Many student loan borrowers consider refinancing through a consolidation, but most don’t know the true costs of this decision. While new terms may look better on paper, they could potentially cost you more in the long-term due to interest. Refinancing also isn’t a good idea for everyone, and its effectiveness can vary based upon your past and present credit scores.

The most common form of refinancing student loans for private loans happens in the form of consolidation.

The idea is this: replace a student loan, or multiple student loans, with a new loan at a lower interest rate.

This can be done by reaching out to your lender and requesting this option or by reaching out to another lender who offers student loan refinancing.

The Benefits

Refinancing student loans typically has one of these benefits:

Reduced interest rates

Reduced monthly payments

The convenience of one monthly payment

It’s important to identify what your needs are before moving forward with refinancing student loans. The best benefit is to receive lower interest rates, which can save you thousands, but this option won’t be available to everyone.

This is where the credit score comes into play. If you have improved your credit score since you first applied for the loan, chances are you can negotiate a lower interest rate, either with your lender or a new lender. The change in interest rate will likely be determined by how much your credit score has improved.

On the other hand, if your credit score hasn’t really improved much, you will just be getting the benefits of reduced monthly payments and the convenience of making just one payment each month. These can be useful perks in the short-term but will cost you more over the course of the loan.

Federal vs. Private Refinancing

When it comes to refinancing, there are many differences between private and federal loans. Consolidation is just one of many options available to consumers who want to refinance federal student loans. And, it’s important to understand that consolidation isn’t always the best option.

Income-based repayment options and other plans could be much more beneficial to the consumer. If you rush into federal loan consolidation, you may lose the eligibility for some of these potentially better programs.

Also, federal borrowers should always keep one rule in mind: never consolidate federal loans with private loans. Very few lenders even offer this option, but it is possible. Doing this will strip away some of the benefits available for your federal loans, as they will basically become private loans in this process.

In some cases refinancing student loans is a great idea. As we have shown, the savings can be significant. But before moving forward, it may be a good idea to get some professional advice.

To sort all of this out and make the best decision for refinancing student loans (especially federal loans), sign up for free student loan counseling. A nonprofit counselor can help determine the best way to manage your student loans.